Why Phillip Capital believes value investing may make a comeback

The brokerage house is expecting the onset of a capacity‐creation phase soon

The recent bout of underperformance for value investors in India may be ending, believes Phillip Capital.

The brokerage noted in its 12th May India Strategy report that the MSCI India Value index has underperformed the MSCI India Growth index since the 2008 financial crisis. The value index gave 300 basis points lower returns than the growth index.

The reason for the underperformance was falling economic output, high inflation and stalled projects. However, current indicators suggest a return to higher gains for value investors. Analysts Naveen Kulkarni, Anindya Bhowmik and Deepak Agarwal noted that the MSCI India Value index is trading at just 10.5 times its earnings one year from now while the growth index is at 18 times the same figure. The former is below its mean of 12, while the latter is above its mean of 17.

Earnings themselves are likely to change trajectory believe the trio.

"Expectations from growth stocks, with their sustained outperformance in the last five years, have led to consistent upward earnings revisions. On the other hand, sustained underperformance of value stocks has led to consistent earnings downgrades. The scope for positive earnings surprise in growth stocks is now limited while a major improvement in the earnings trajectory of value stocks seems round the corner," said their report. '

"We believe that the inflection point of value taking over growth is getting closer and that portfolio allocation should be progressively more inclined towards value... As we expect the onset of a capacity?creation phase, value investing will soon become the dominant investment strategy," it added.

The MSCI India Value index has outperformed the MSCI India Growth index since 1999.